I want to start because a lot of people draw parallels to 2008 and given your
experience there, you were chief economist, top rated economist at Bear
Stearns. Are there parallels to that moment and
the one we're in now? I think there are parallels and
differences. The parallels are there was really a
maturity mismatch at some institutions and the Fed had been raising rates,
remember, a long period of rate hiking leading into 0 8.
And but then some big differences. One is this time the discount window is
available to the major institutions. That wasn't the case then.
And so that gives some backstop and you're seeing it really play out now.
And another big difference is the Fed itself is buying huge amounts of
duration and other central banks are as well.
ECB and Bank of Japan are holders of giant amounts of duration, which wasn't
the case in 2008. They were at that time.
Remember, central banks only only owned Treasury bills.
So that creates a different complexion to the market and a different set of
tools that the regulators have to intervene.
So today, I think the big issue is whereas growth going to come from into
the future. Before we get to that point, I know you
want to bleed that over into the rest of the world, which is an important point.
I want to talk about the similarities. You talk about a liquidity mismatch.
A lot of people draw the distinction between a liquidity mismatch is not a
credit crisis. It's not a credit crunch.
But back in 2008 and actually I would argue earlier, Juliette Saly, the
liquidity mismatch led to a credit crunch.
How close is that sort of direct parallel, this sort of direct bleed over
into credit conditions as interest rates are held down, which was the case in 0 4
or 5 or 6, and now in this current or over the last 10 years, then that causes
asset prices to go up. So there is a workout period after that.
So I think that's what we're in now. How do you adjust asset prices if yields
are going to be much higher than what you thought two years ago or one year
ago? And that's the challenge facing the
market. How do you allocate the losses?
I'm hoping that they don't go to the poor, to developing countries and to
average taxpayers, that an issue is if you've created all that asset price
boom, which can be out, can the losses be allocated back into the same markets?
And that that's a big challenge. So can you elaborate a little bit on the
disproportionate holding of the burden that you see in the developing nations
that may affect the growth profile of the world?
Over the last 10 years or so, there was this big concentration of wealth in a
narrow group in the advanced economies that was fueled by both fiscal deficits,
the huge run up and the debts across the advanced economies and also the central
banks themselves buying duration that supports asset prices.
Long term assets go up when there is a giant buyer, constant buyer of those
assets. And so that leaves not enough capital
elsewhere in the world. We've seen the slow growth in developing
countries, in part because there's not good access to global capital markets.
And now going forward, the challenges a lot of the world's capital is going to
be used by the advanced economies to keep rolling over the debt.
So a big challenge for billions of people around the world is where is
there going to be available capital. They have this big population growth in
many countries, and yet the capital goes to countries
that have declining populations. So how much does that lower your
projection for global growth and how much has that lowered it even over the
past couple of months? We had lowered it substantially a year
or a year and a half ago, recognizing that there was, you know, inflation
really was a challenge that the central banks were going to be raising.
Cost of capital goes up, so growth forecasts go down.
So in the latest, what we've seen as advanced economy growth expectations
have gone up some late last year. That's the U.S.
and China in particular, as China lifted the the the the embargo, the lockdown.
And so as as we're looking at it now, the growth is slow but positive in
advanced economies. But in developing countries, not much
investment taking place. That I think is the big challenge.
I'll be giving a big speech tomorrow at CSA US in Washington, DC on the
importance of private private capital enabling.
How what are the tools and techniques in the world banks in the middle of it
trying to get countries to be more attractive to capital investment.
In the meantime, we do get this Fed decision later today.
How does that connect to the stripping out of capital from some the developing
world? If the Fed does go ahead and.
Rates by 25 basis points and increase their forecast for where the terminal
rate ends up. What kind of magnified effect could that
have? I heard you talking before.
They'll be sending signals of what what the prospect is.
I think important is for the U.S. and the advanced economies to think
about how do we encourage more supply. And that brings down the inflation rate.
So central banks can be more involved or recognize they are they are affecting
the lending that goes to small businesses.
And so are there ways with regulatory policy or with the bond with the this
duration purchasing that the central banks do it?
So my view is that when central banks buy duration, that actually ends up
slowing growth on average. If you look back over the last 10 years,
there's been this anomaly that they're buying huge amounts of bonds and yet
you're not getting that the the growth rate that you expected from that.
So going forward, I think there has to be a really deep dive into how do we get
more growth and capital allocation worldwide.
Until then, given that all things being equal, a lot of central banks are
turning to the same playbook and you're actually seeing the balance sheet expand
in the U.S., how slow could global growth get?
Yeah, I think it can be even a recession and that's not off the table.
The latest recession, you couldn't have a global recession.
We defined that as when the growth rate isn't equivalent to the population
growth rate. So you have people moving backward on
average. That depends a lot on the big on the
advanced economies. The US is the is the by far the biggest
economy and so its growth rate matters. And so people are watching exactly
what's going on in the in the loan officer survey.
For example, there was just a reference to that on your show.
That's a that's an important one. Are banks lending given that they see
this these difficulties? So all things being equal, are the
chances of a global recession much greater today than they were two weeks
ago? No, I I would not say that there was a
there was a recognition of individual bank problems.
They were strongly dealt with by regulators.
So the bigger issue, rather than looking at the near-term impact, I think we have
to just stay with the idea of what's going to be done for the next three year
growth rate of the world. How do you get out of this kind of trap
of higher and higher interest rates? And I think the solution has to be more
output. How do you how do you how do you get
more services, more goods into the global markets in order to stop the
inflation trend? Given that, what do you hope to power
those today, huh? No, I he's he's the policy maker.
I think he's doing send very strong signals.
Well, sure. I'm sure people will read into that.
And why are you in New York? There's a big U.N.
conference today on water. Water is really important, clean water
for people. It helps children grow to their full
height and it helps agriculture be able to produce.
So big conference on that. And I'm also doing other other events in
New York.